A global crisis in engulfing the global business of sport and the collapse of the giant Sportworld company in England on Friday has huge implications for Australian sport, as Patrick Fitzgerald reports.
Only last week in a confidential agreement the company walked away from a marketing partnership that came with a 15% equity holding in the troubled National Basketball League (NBL).
After guaranteeing to pay somewhere between an estimated $2 to $3 million annually to the NBL for all marketing, TV and signage rights, which was just one of a multitude of international sports rights properties now imploding across the entire spectrum of world sports. The formerly high-flying acquisitive company that owns among other Australia companies, the Boyer Group through the acquisition of its UK parent Sports and Outdoor Media International (SOMI) and leading sports management company Elite Sports Properties (ESP), and active sports group Infinite Management Solutions (IMS), was worth more than $800 million at the height of the media boom.
It’s share price last year reached a high of around 775p and when its shares were suspended earlier this month at 5 1/4p, its implosion has further highlighted the crisis that is now hitting sports rights globally.
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Post September 11, global advertising has been significantly contracting across all media, but it’s the global sports market that’s been hardest hit. Global giants including News Corp, which has faced massive recent write-downs on its premium US TV sports, the failed German media giant the Kirsch Group that includes among its sporting rights the next two soccer World Cups and Formula One, ISL the company that previously bought the FIFA rights through Kirsch, ITV Digital that has also (like Sportsworld) just gone into receivership leaving the English Football League still owed 178.5 Pounds just half way through a three-year deal, has left sport reeling.
With significantly falling ad and sponsorship revenue, set against inflated values for over-priced sports rights and the purchase of companies like ESP, Sportsworld’s strategy meant it was being crunched at both ends of the market. The market first became aware of deep problems when the company was forced to issue a profit downgrade and its share price went into freefall in February, amid concerns as reported by the Financial Times, over its accounting practices and a profits warning. Its credibility with the UK market was then left in tatters.
The company under former Australian ad-man Geoff Brown (no relation to Eddie McGuire and the AFL’s lawyer Jeff Browne) had in the past two years heavily committed to not only developing international TV shows including the UK Pop Stars franchise, and sports-based management companies, but began doing long-term sporting rights deals with international associations including International Triathlon Union and the Association of Surfing Professionals, as well as moving into the extreme sports market, particularly in the US. There are also allegations being investigated by authorities concerning potential irregularities in Brown’s share trading activities and employment of his wife among other matters.
Price Waterhouse Coopers have been appointed administrative receivers to the company. David Hargrave, a PWC partner told the FT: “The board has worked hard to try and secure a restructuring of the group over recent weeks but the cash needs of the parent company were such that insufficient funds existed to conclude the sale process.” The company had tried to sell itself as a going concern but will now be broken up or seek alternative financing (most unlikely) to restructure its debt. Sportsworld’s subsidiaries – employ 300 staff at offices in the UK, US, Melbourne and Sydney, will continue to trade under existing management.
Putting to one side the sale of individual assets, the NBL isn’t the only one now left with a king-size headache. The future of the company’s stadium signage business which includes rights to such AFL grounds as the MCG and Colonial Stadium, Sydney’s three main football stadiums, Rugby Union internationally and rights held on behalf of English cricket at Test and county level, puts a big question mark over potential revenue already owed to various sports where rumours abound, as well ESP holding merchandising rights via the Australian Cricket Board and the AFL among others.
Effectively, the wash up from this means the local management of Boyer, ESP and other Sportsworld entities have to either leverage buying back their own companies or possibly see them sold from under them, although this may prove more problematical as clearly Sportsworld has already breached conditions of its purchase of ESP under the terms of the original buy out that included upwards of $17 million in shares held in escrow, that never got to be made available or cashed out. But technically right now if you were Nathan Buckley or Michael Klim, your management agency is now in receivership and up for sale. In many conventional international sporting contracts, that alone is enough to trigger an exit clause that would allow high profile clients to become a free agent in a rather literal sense of the world.
But the knock-on effect goes way beyond the likes of surfing, triathlon and major sports and venues like AFL or the MCG needing to consider all aspects of Sportsworld’s demise, this whole domino affect of devalued sporting rights even cuts to the core of the AFL broadcast deal with the TV consortium. Like other rights holders in the global sports industry, they will now be nervous about the real long-term value of their five-year deal. While certainly Nine has screwed the AFL over Friday night football the AFL may yet get the last laugh in terms of selling its product at the height of the sports rights boom. However, before the AFL starts to think they were clever clogs to gain top dollar, any such anticipatory laughter would be rather hollow after the fall out from the Friday night football fiasco. Despite the Foxtel/Austar band-aid, this debacle is nowhere near being resolved to the general satisfaction of most disenfranchised free-to-air viewers north of the Murray.
Also it’s not much consolation if such rights were either negotiated down or simply handed back to you and no one else will back that kind of overcooked value. Yet that is exactly what is facing the English Football League (Divisions 1,2 and 3), where it is estimated up to one third of all clubs now face closure without the ITV Digital TV money they had been promised.
Rights holders everywhere will be nervously reading the fine print (yep that nasty little contractual addendum), after seeing Sportsworld, ITV Digital and Kirsch all biting the bullet because these companies used a model of buying exclusive marketing rights for a huge minimum guarantee. As a top Australian sporting rights lawyer observed to me on Friday, the likes of Sportsworld came to grief because they became almost like “futures traders”. They were banking (hedging) on being able to very profitably recoup their investment by exploiting those rights to media, sponsors, licensees etc. As he pointed out it is ironic that the commission-based model more generally favored by IMG and others of their ilk (and which leads to them being accused as sharks rather than investors in sport) continues to be resilient.
While we are hardly at the dot com equivalent in terms of sports rights as going concerns, there can now be no question that we will see a fundamental shift in global investor sentiment. Already European capital sports skeptics who previously exhibited little faith in the rosier financial “blue sky” modeling of the industry and its boosters, and kept their nerve or held that judgment, will now be saying: “I told you so”.